Fitch: SCE&G's Nuclear Construction Settlement Agreement Reduces Key Credit Concern

NEW YORK--()--Fitch Ratings considers the terms of the settlement agreement between South Carolina Electric and Gas Co.'s (SCE&G; Issuer Default Rating 'BBB'/Outlook Stable) and key interveners to update the construction and capital cost schedules for the new V.C. Summer nuclear units to be favourable and consistent with Fitch's base case rating forecast.

The agreement approves SCE&G's election of the fixed price option, includes capital cost increase of $831 million (substantially all requested capital costs increases), reduces the allowed return on equity (ROE) by 25 bp to 10.25% beginning Jan. 1, 2017 and freezes capital costs revision requests until January 2019. In light of the fixed cost option, the freeze on capital cost increases is a manageable risk, in Fitch's opinion.

The settlement agreement is subject to approval by the Public Service Commission of South Carolina (PSC). Given inclusion of the South Carolina Office of Regulatory Staff and other significant parties, Fitch expects the PSC will be supportive of the settlement agreement, consistent with previous PSC decisions and the Base Load Review Act (BLRA).

Although Fitch remains concerned that investors could be required to share the burden of future capital cost increases in a manner that would weaken SCE&G's and SCG's credit metrics, the probability of significant incremental capital costs increases is greatly diminished, in Fitch's view, by the election of the fixed price option. Fitch remains concerned by the weak credit profile of Toshiba Corp (not rated by Fitch), the majority owner of contractor Westinghouse Electric Company, LLC. As well, the freeze on capital costs revision filings until seven months prior to the projected start of commercial operation, January 2019 under the current construction schedule, introduces the risk of delayed cost recovery should the project face further difficulties. The financial impact of the reduction to the allowed ROE to 10.25%, down from 11% initially authorized, is modest over the 2016 - 2018 rating horizon but highlights Fitch's concern of future credit quality erosion.

SCE&G filed its petition with the PSC to approve an updated construction and capital cost schedules, including the election of the fixed price option, in May 2016, following the October 2015 Amendment to the Engineering, Procurement, and Construction agreement. The fixed price option essentially caps the expected project cost to $7.7 billion with expected delivery date of Unit 2 in August 2019, and of Unit 3 in August 2020. The amendment resolved most outstanding disputes and covers all design changes that may be required to comply with current nuclear regulatory law. However, recourse to a dispute resolution board to set a revised construction milestone payment schedule highlights lingering risks with the EPC agreement, in Fitch's view. A public hearing on the settlement agreement is scheduled in October 2016 with a PSC decision expected in late November 2016.

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Contacts

Fitch Ratings
Maude Tremblay, CFA, +1-312-368-3203
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Robert Hornick, +1-212-908-0523
Senior Director
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Maude Tremblay, CFA, +1-312-368-3203
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Robert Hornick, +1-212-908-0523
Senior Director
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com